The traditional hotel still gets the bulk of the lodging business, but it is still losing ground to

Editor's note: Each week we publish a favorite story from  Fortune's archives . As the final weeks of summer approach, many will be taking that long-needed vacation. Some will fly to far off places. But equally as many, if perhaps not more, will hop in their cars for a road trip across the country. Somewhere car rentals anchorage between home and destination, they'll rest in one of the many motels dotted along the interstate. Ever wonder how these temporary stays got "bigger and more elegant" over the years? Fortune chronicles the motel boom in a story from 1963.
FORTUNE -- One curious phenomenon of the real-estate markets in recent years has been a kind of blurring of some familiar old distinctions. Previous articles in this series have already suggested, for example, that single-family houses and apartments are becoming more like one another. In the public-lodging car rentals anchorage industry, the blurring car rentals anchorage of old distinctions between hotels and motels has proceeded steadily, as the motels get bigger--and yet the blur has not, somehow, diminished the furious competition between the two. Right now the motels seem to be winning it.
The hotel industry's great building car rentals anchorage spree of the past few years has been oddly deceptive. Businessmen who spend much time on the road have seen one tremendous new hostelry after another built, especially by the big chains, in just about every major city in the U.S. The Hilton and Americana in New York, Executive car rentals anchorage House in Chicago, the Sheraton-Lincoln car rentals anchorage in Houston, the Royal Orleans in New Orleans, the Portland (Oregon) Hilton, the Denver Hilton, the Jack Tar in San Francisco, the Sahara skyscraper car rentals anchorage in Las Vegas--even the traveler who has not got around to visiting car rentals anchorage them can scarcely have failed to note their breathtaking presence.
car rentals anchorage He must also have noted that there is a motel boom under way. This boom is nothing car rentals anchorage new, of course, but in the past few years the pace of building has plainly been stepped up along the big turnpikes and interchanges, and the product itself has steadily become bigger and more elegant. Motels have also shown up more and more in the same downtown areas that have those massive new hotels, and the motels are themselves fairly massive in many cases.
The broad impression created by all this building is of a lodging industry trying desperately to keep up with an inexorably swelling demand. The supply of lodging space, in any event, has been rising sharply. car rentals anchorage According to the most conservative estimates, in 1962 alone about 2,000 motels with 150,000 rooms were built, vs. about eighty hotels with 25,000 rooms; all together, the cost of these buildings was over $1 billion. By contrast, only about 340 new hotels were built in 1925, the peak year of the industry's last great boom.
It is, nevertheless, a fact that over-all demand in the lodging industry is not rising substantially. The demand for hotel space and services is actually declining, and rapidly: since the mid-1950's, average hotel occupancy rates have fallen from about 72 to 62 percent. Motel occupancy has held steady at around 70 or 75 percent, which suggests, given all the new building, car rentals anchorage that aggregate demand for motel space has been rising. But this rise has taken place at the expense of conventional hotels car rentals anchorage .
Howard Morgan, a professor of business administration at the University of Arizona, enlarges on this point in his forthcoming The Motel Industry in the U.S.: Small Business in Transition . After an exhaustive analysis of U.S. census data, he has concluded that, measured in constant dollars, the sales of the public-lodging industry as a whole remained virtually the same between 1948 and 1954, and showed only a modest increase between 1954 and 1958. But the sales of the motel sector alone tripled during the ten-year period (still measured in constant dollars), and have continued to climb ever since. Professor Morgan concludes that the growth of the motels has been based simply on a shift of patronage from the hotels.
The traditional hotel still gets the bulk of the lodging business, but it is still losing ground to its rival. In 1948, when total industry revenues came to about $3 billion (in 1962 dollars), the motels accounted for only 8 percent ($246 million) of this amount. But last year the situation was quite different: the motels' share of total revenues, car rentals anchorage which were now up to $4.4 billion, had risen to more than a third ($1.6 billion). The bigger car rentals anchorage and grander motels have not stopped intensifying the pressure on hotel revenues and profits. To the casual business traveler, it may appear that the hotel industry is trying to solve its problems by building even bigger and grander, and at a fast look this policy may seem to be succeeding; car rentals anchorage it is a fact, in any case, that the big new hotels mostly seem to be doing well, and it is easy to conclude that the hotelmen's miseries are all concentrated in their older buildings.
This conclusion would be only partly valid. There are, in fact, good reasons for believing that the present surge of major-hotel building will soon have to subside--indeed, that it is ended already--but that the motel boom still has a long way to go.
The underpinnings of the motel boom are by now well known. car rentals anchorage An article in FORTUNE pointed out some of these four years ago (see "The Motel Free-for-All," June, 1959). In the first postwar decade it was already clear that longer vacations, expanding suburbanization, the increasing decentralization of industry, car rentals anchorage and the sharp rise in automobile travel had all combined to create a demand for better wayside accommodations--a demand that neither the older motel and "tourist court" car rentals anchorage nor the traditional in-town car rentals anchorage commercial hotel was able to satisfy.
The result was the Grand Motel, an ingenious kind of caravansary developed by an ingenious new breed of motel investors. Typically containing fifty or more air-conditioned rooms, it attempted to strike a balance between the tourist court and the resort hotel, offering free on-site car rentals anchorage parking and self-service devices along with swimming pools, free television, cocktail lounges, "gourmet" restaurants, and room and porter service (which, however, was optional) .
In general, motels are a much more attractive proposition to investors than hotels. Because the motel's land, construction, and operating costs are all lower in relation to revenues, car rentals anchorage the return on investment for a grand motel is much higher than for a full-service hotel. Last year. a typical fifty-room motel with, say, a 75 percent occupancy rate earned about 16 percent on the investor's equity. (Earnings would be calculated after payment of real-estate taxes and amortization of debt but before depreciation and capital improvements, in line with the industry custom.) Some well-situated and well-managed grand motels earned over 20 percent. By and large, hotel investors consider car rentals anchorage themselves lucky if they can earn 10 percent.
Thus stimulated, a sizable army of institutional and private investors--many of the latter business and professional men banded together in investor syndicates--began pushing money into the motel field in the early 1950's. According to industry chroniclers, the first true grand motel was erected in the vicinity of Fort Worth in 1952. The edifice has since undergone numerous changes of ownership and is now barely recognizable to early patrons. But it has had numerous heirs. There are now upwards of 5,000 motels with fifty or more rooms, most of them professionally managed, accounting for about half of all motel capacity; 40,000-odd smaller motels have the other half. It is the larger units that are competing most vigorously with the hotels for the attention of the traveling public.
Traditionally, the demand for transient lodging car rentals anchorage and services has come from four main kinds of travelers: salesmen, touring families, executives on business trips, and convention-goers. All four groups were once dependent almost entirely on the railroads, which the older downtown hotels were built to service. Many of these travelers have long since switched their allegiance to automobiles; there are now 66 million passenger cars registered in the U.S., vs. 27 million in 1940; and the annual "vehicle-miles" recorded by these cars have increased from 250 billion to about 600 billion. Many of the executives and conventioners, of course, have switched to air travel, especially since the jets, but these travelers too have been ending up increasingly in motels--on the superhighways rimming or leading into town, or at the airports, or in the suburbs near the new industrial parks, and, recently, in downtown itself. The grand motel, car rentals anchorage in short, has moved in on all the older hotel markets for lodging business. Many also added banquet and meeting rooms to their properties recently, and now compete vigorously for social and business gatherings and small conventions, too. Indeed, the grand motel has come so far that it is often not very clear whether a given structure should be thought of as a hotel or a motel. (The formal distinction is that motels. should have "one-for-one" parking, i.e., space for as many cars as there are rooms, and should also offer non-service to those customers who prefer not to have doormen and bellhops under foot as they come and go. A less formal distinction is that motels generally have the television sets bolted to the wall.)
The effect on the older in-town car rentals anchorage hotels has been disastrous. First and hardest hit were the smaller car rentals anchorage hotels in the medium-size and smaller cities. It is hard to nail down the point statistically, but it seems clear that average occupancy of hotels with less than 200 rooms cannot be much above 50 percent, which suggests that most of them are losing money. (Ordinarily, a hotel would be able to break even at 50 percent occupancy only if it were owned free and clear.) Many have been forced out of business. In some cases their owners have converted the structures to other uses--e.g., made them into college dormitories, residences for retired people. A few of these hotels have been dem